Working Capital Focus Paying off for Europe’s Largest Companies

Europe’s largest listed companies are starting to see the fruits of an increased focus on working capital as costs and debt start to decrease and cash on hand and free cash flow increase, according to research from REL.

The working capital specialist, a division of The Hackett Group, issued its 16th annual
‘European Working Capital Survey’
, which analyses the published accounts for 2013 of 993 of Europe’s largest public companies and compared them to previous years’ performance in order to determine how effective they are at collecting from customers, managing inventory and paying suppliers.

REL reports that despite declining European gross domestic product (GDP), down 0.1% resulting in lower company revenues (down 1.6% on 2012) and profit margins (earnings before interest and tax (EBIT) down 5.6%), the cost of goods sold is down 1.2% year on year (YoY) while total debt is down 1.6%. Meanwhile, cash on hand and free cash flow are up 2.1% and 8.1% respectively.

As well as improvements in costs, debt levels and cash positions, days working capital (DWC) – a measure of the cash conversion cycle that gives insight about the underlying health of a business – has improved two per cent YoY since 2012. This is a key metric because it measures the average number of days working capital tied up in the operating cycle.

The report finds that despite the positive working capital trend there is still a total improvement opportunity among the companies studied of nearly €900bn (around £720bn; US$1,209bn), the equivalent to 8% of European GDP. This is made up of a €300bn improvement opportunity in payables, a further €296bn in inventory and €293bn in receivables.

Overall, the upper quartile of companies in the group studied by REL operates with 60% less working capital than typical companies within their respective industries – collecting from customers 2.5 weeks sooner, paying suppliers 2.5 weeks later, and operating with nearly 70% less inventory.

However, sustaining working capital improvements still remains a major challenge, the research found. Only 14% of companies in the REL study improved DWC for three consecutive years, with just one, Germany’s BMW, improving all three elements of DWC – payables, inventory and receivables – every year for three years.

Capital expenditure (capex) reinvestment declined by 1% in 2013, possibly marking the beginning of a shift away from a period of heavy investment that started in 2010. Annual dividends increased by 1% from 2012 to 2013 and are now up 26% YoY over a three year period.

A Holistic Approach

“This year’s study shows how an effective working capital strategy offers a clear solution to the general cautiousness that still persists in much of the European business environment, despite the slowly improving economic situation,” said Guy Cabeke, associate principal, REL.

“To further negate any financial uncertainty, however, addressing the total working capital opportunity that remains is essential, and while there’s a slightly larger opportunity for improvement within payables, a holistic approach to total working capital management is the surest path to making a sustainable impact on overall company performance.

“The message to those that have started on this path is very much to keep going and to those that haven’t to get their act together or otherwise risk reducing their ability to compete with their more efficient peers in their respective industries.”

UK Performance


REL reports that the UK has a better performance in all areas of working capital compared to the rest of Europe. Receivables and inventory performance is best in class compared to the top countries and only France has a better payables performance.

Although revenue declined in the UK by 1%, cash on hand increased by 8% and there was also a sharp increase of 192% in free cash flow since 2012, increasing from €19bn to €54bn (£15bn to £43bn)

However, debt continues to increase among UK companies, up by 3% from 2012, and this has been the trend for several years.

Additional Observations

Across Europe, deteriorating revenues coupled with a reduction in net working capital indicate improving overall efficiency within companies. Yet cash conversion efficiency (operating cash flow/ revenue) has deteriorated for three years in a row, indicating that companies are taking longer to convert sales into cash.

Gross margin and operating profit of companies are also deteriorating, while selling, general and administrative cost as percentage of revenue increased YoY among the companies studied.

Improvements in free cash flow performance are being driven by a culture where cash hoarding and cheap debt financing is an accepted process, said REL.

Corporate cash performance, or free cash flow, represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. This makes it important because it allows a company to pursue opportunities like acquisitions, develop new products or reduce debt, ultimately enhancing shareholder value.

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